2019 rate increases fading
While year-to-date global reinsurance pricing is up slightly between 0 and 5 percent in 2018, in aggregate, momentum is fading as the sector heads towards the January 2019 renewals, according to S&P Global Ratings.
“What’s particularly disappointing for the sector is if you look at the Florida renewals in the summer, generally rates are flat or very slightly up, even in a market that suffered from hurricane Irma,” David Masters, director at S&P, said during a pre-Monte Carlo Rendez-Vous briefing in London.
Insured losses for 2017 global natural catastrophe events, which included hurricanes Harvey, Irma and Maria, were estimated at $136.06 billion by Swiss Re Institute’s sigma report, a 186 percent increase from $47.56 billion insured losses in 2016.
Market participants were hoping for significant rate increases after the 2017 catastrophe events but were disappointed by only moderate increases in the January 2018 renewals as overcapacity in the sector prevented a stronger uptick.
“We don’t think the cat events were sufficient to have a real impact in terms of pricing,” Masters said. “We are increasingly moving away from a situation of saying that a 1-in-50-year cat event would do the job in terms of leading to significant rate hardening.”
Instead, S&P analysts increasingly believe a significant rate hardening may only be triggered by an overall reserve strengthening in the market.
“If reinsurers ultimately turn out to have undercut their reserves and have to make significant reserve strengthening, that is the more pervasive risk that would lead to a broad rate hardening across multiple regions and multiple classes of business, rather than a single large cat event in San Francisco or in Miami,” Masters explained.
In 2017, the reinsurance sector reported its worst return on capital in more than 13 years. At only 1.2 percent, it was 6.3 percent below the sector’s cost of capital, according to S&P.
The rating agency expects the reinsurance sector’s return on capital to increase to around 6 to 8 percent by year-end 2018 due to modest price rises following the 2017 catastrophes.
However, this remains close to reinsurers’ cost of capital, which S&P expects to increase modestly through the rest of 2018 and in 2019, remaining within the 7 to 8 percent range.
The reinsurance sector continues to experience overcapacity which prevents rates from hardening. While some market observers expected a reduction of capital in the alternative reinsurance sector after the 2017 losses, the segment reloaded quickly, helping to dampen rates.
Alternative capital grew to $95 billion in the first quarter of 2018 compared to $89 billion at the end of 2017, according to S&P. Alternative capital represented 16 percent of the global reinsurance capital in the first quarter, which overall grew to $610 billion from $605 billion at 2017-end.
As a response to its resilience, reinsurers are embracing third party capital through instruments such as sidecars, collateralised reinsurance, and catastrophe bonds, according to the presentation.
“We are seeing some reinsurers increasingly looking to use alternative capital as a way of generating fee income,” Masters said.
